The Homer Ferrington gas drilling rig, operated by Noble Energy and drilling in an offshore block on concession from the Cypriot government, is seen during President Demetris Christofias' visit in the east Mediterranean, Nicosia November 21, 2011.

Credit: Reuters/Cyprus Public Information Office/Handout

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LONDON (Reuters) - Cyprus' gas is worth less than $2 billion (1.3 billion pounds) based on reserves found so far and there may be too little to develop anyway, leaving plans to mortgage them against a $13 billion bailout unlikely to fly, Reuters research has found.

So far, an estimated 200 billion cubic metres (bcm) of natural gas worth $80 billion at current prices have been discovered in the Aphrodite gas field in Cypriot waters.

The Cypriot government says that it hopes to begin exports of liquefied natural gas from 2018, although most analysts say production is unlikely to begin before 2020 and some doubt whether the fields will be developed at all.

"If Cyprus has found only 7 trillion cubic feet (200 bcm) right now, that's not yet enough to think about doing LNG given the number of projects ahead in the queue, such as the over 100 tcf of gas already found in East Africa," said Kim Fustier, oil and gas analyst at Credit Suisse.

Cyprus' financial system has collapsed because banks bloated with Russian cash lent heavily to Greece and were then caught out when Greek borrowings lost much of their value. Proposals submitted to the Cypriot parliament to recover from the resulting crisis include a "solidarity fund" to bundle state assets, including future gas revenues and nationalised semi-state pension funds, as the basis for an emergency bond issue.

The European Union is demanding 5.8 billion euros of security in return for a 10 billion euro (8.5 billion pound) bailout.

A gas price of $13 per million British thermal units (mmBtu) would justify an investment in a 5 bcm per year export facility to operate over 25 years, delivering $1.55 billion of value, only about a fifth of what Cyprus needs to plug its funding gap.

The Reuters analysis, vetted by several analysts, assumes the gas facility is built in seven years at a cost of $2 billion per billion cubic metres of annual capacity. It assumes the project makes margins of 75-80 percent on gas sales from 2020, and applies a 10 percent discount rate to future cash flows to arrive at a net present value for the project.

But analysts say gas prices could fall after 2015 when a wave of new supplies become available in the U.S., Australia and Africa.

And French bank Societe Generale expects European spot gas prices to be around $10-11 per mmBtu in 2020 as U.S. exports also begin to pull down global prices.

"U.S. LNG exports are a game changer and expensive LNG projects will no longer receive any Final Investment Decision," the bank said in a report published this week.

MORE GAS NEEDS TO BE FOUND

In order to fill its $7.5 billion funding hole, Cyprus would have to export around 18 bcm of gas per year, but at 450 bcm spread over 25 years, it would also require more than twice the gas discovered to date. Use the calculator to adjust the values involved.

A project that big would also require at least $36 billion of upfront spending, Reuters analysis suggests, about 1.6 times Cyprus's current GDP, before gas started flowing around 2020.

One way to scale its gas reserves would be for Cyprus to coordinate its production and sales with Israel, which has found bigger reserves in its waters.

Cyprus' Aphrodite gas field lies close to Israel's 480 bcm Leviathan field, and the two governments have signed cooperation agreements.

Together, these two fields could meet Europe's entire gas needs for almost two years.

Some uncertainty remains though, because Israel has yet to say whether it will allow significant gas exports. Further complicating the issue for any potential developer, Turkey, a key player in the region's energy politics, has made clear it will oppose any attempt to pre-sell Cypriot gas.

Industry sources also say that high development costs in the seismically active and deep waters of the eastern Mediterranean will mean that the project's profitability is in doubt.